Baillie Gifford Positive Change: why we had to sell some tearaway Tesla

It has been a very good year so far for the Baillie Gifford Positive Change fund.

The fund more than tripled in size from £219.5m at the start of the year to £700.4m at the end of June. According to Morningstar, net inflows have risen every month. While in January the fund attracted just £17.8m, by May that had risen to £96.3m and in June investors poured in over £123m.

Performance has also been strong. Over the first six months of the year the fund’s totals returns were 34.3%, well above its dollar-based FTSE World benchmark which returned just 0.57%.

There are plenty of reasons for this strong performance and increased popularity. Covid-19 has helped the fund due to its heavy weighting in healthcare companies, particularly US biotech Moderna (MRNA.O)which saw its share price rise 250% while developing a vaccine against the virus.

Investors have also been moving towards sustainable strategies in greater numbers over recent years. Positive Change launched in 2017, and now that it has a three-year track record more investors are choosing it. 

For example, Ayres Punchard, an Isle of Wight-based financial adviser that specialises in sustainable investments, recently moved the fund into its Key to the Future model portfolios. 

‘It had been on our radar for a couple of years, but until it had a three-year track record it could not be included,’ says managing director Chris Welsford (pictured below). 

Positive Change fits into the portfolio’s goal of having a positive impact as well as simply screening out companies that investors do not want to support. 

‘The main reason we chose it is that it helps us move from being merely sustainable to impactful. We want the Key to the Future portfolio to invest in innovative solutions that address the world’s development needs. That’s where we believe the serious return will come from in the future,’ Welsford says.

‘That is a significant challenge for a portfolio that invests in the secondary markets. But funds like Baillie Gifford Positive Change and the Triodos Global Equities Impact fund, which has also been included in the revised Key to the Future portfolio, offer this impact, without straying into the riskier, primary-market, micro-cap, end of the spectrum.’

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Tesla driving returns

And then there is the case of Tesla (TSLA.O), the electric car and renewable energy company, which is also the Positive Change fund’s top holding. Tesla’s share price has been nothing short of extraordinary this year.

Despite the pandemic, shares have risen 253% from $418.3 at the start of 2020 to $1,476.5 today. It is now the most valuable car company in the world, with a market capitalisation of $273bn (£211bn).  

‘The progress that Tesla has made over the long term is, frankly, quite astonishing,’ says Lee Qian, Citywire AAA-rated co-manager of the Baillie Gifford Positive Change fund.

Qian has every reason to be happy with Tesla. The electric car manufacturer contributed 9.4% to the fund’s performance in the first six months of the year, making it by far and away the biggest contributor to performance in 2020. For context, the second biggest contributor to the fund’s performance is glucose monitor manufacturer DexCom (DXCM.O), which has contributed 4.9%.

In fact, Tesla performed so well that Qian and his co-managers Julia Angeles, Kate Fox and Will Sutcliffe, all Citywire-AAA rated, had to sell shares to avoid the holding representing more than 10% of the Positive Change fund’s portfolio.

All this has prompted warnings about a ‘Tesla bubble’, but Qian is not concerned. ‘It is entirely possible that at the end of the year, the share price might be quite a bit lower than it is now. That’s fine for us,’ he says. ‘We are not traders. We are not looking to profit from 20% or 30% price movements over a six-month period, we are holding the company for the long term.’

But if Tesla is making an obvious contribution to Positive Change’s returns, how does it fit into the fund’s other goal of having a positive impact on the world?

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‘Every single company in the portfolio must be contributing towards a more sustainable future through their products and services,’ explains Qian. Investors can see what their investment is returning in impact with a calculator on Baillie Gifford’s website.

The straightforward pitch is that by making electric cars, Musk’s (pictured above) company is combating climate change. ‘Tesla is making a product that is going to be immensely helpful for us to combat climate change with its electric vehicles. Energy storage and solar panels are also great for this.’

And yet, Qian acknowledges, the company has plenty of critics. ‘Over the last three and half years there have been constant attacks on Tesla,’ he says. ‘On investments, on sustainability, on pretty much every angle that you can attack a business from there has been someone attacking Tesla.’

Some of this comes from an online group called TSLAQ (Q is the Nasdaq symbol for bankruptcy), which has used aggressive tactics against the company in an attempt to undermine its share price. A lot of the arguments from people claiming to be from this group are centred on controversial Tesla chief executive Elon Musk

However, these ‘attacks’ have also often come from analysts and journalists who have been reporting the facts. For example, in 2019 Forbes revealed that Tesla was fined more than any other automotive manufacturer in the US for health and safety breaches between 2014 and 2018.

‘It’s an engagement issue for us,’ says Qian. ‘There’s no doubt that in the past there were things that Tesla could have improved in its health and safety.

The fund has three impact analysts in the team who assess how companies are meeting sustainable goals. They will look at certain targets, such as UN Sustainable Development goals and how many people benefit from the impact of a product, and map those against a company’s performance. They will also engage with businesses the fund invests in.

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‘As a firm, we have engaged with Tesla on those health and safety issues,’ Qian says. ‘One of our impact analysts, went out to Tesla’s factory and met with their head of environment and health and safety. They spoke about how the company is improving health and safety on the factory floor.

‘We reaffirmed our commitment and support for the company to really invest in health and safety. Tesla has come out with the ambition to be the safest automotive factory in North America, and we have monitored progress since then. Over the last couple of years, the injury rates have reduced, it has really made a lot of progress on that.’

Whether this progress will be maintained is another matter. Last year, a Californian judge ruled that Musk and his fellow executives broke the law when they tried to stop Tesla employees unionising. He was also criticised in May for reopening the Tesla factory in California despite the spread of Covid-19, although a court did rule that appropriate safety measures were in place.

Qian acknowledges there are still faults in the business, but is optimistic about the ability to engage with companies for better results.

‘It’s a controversial business, we’re not going to say every single aspect of how it operates is perfect, and there are always things that can be improved. But just like the health and safety example, we are very confident that through good engagement and good dialogue with the management team, we can help them and support them on that journey to improve.’

Inevitably there are trade-offs in any investment decision. This is no different when it comes to sustainable funds. A company that has a positive impact is not always going to be one that is uncontroversial. Investors, and advisers, need to do their research, and decide for themselves whether they trust managers to engage on their behalf. 



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